IRS Form 990 Changes

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IRS Form 990 Changes Powered By Docstoc
					Governance Issues Related to the
Form 990

May 12, 2011
                      Douglas Boedeker, CPA, CMA
Course Outline

                g
    Form 990 Background
   Overall Good Governance Themes
   Compensation Policies – Schedule J
   Form 990, Part VI – The Governance Centerpiece
   Consideration of the other schedules
   Checklist of Required Schedules

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Background on the Federal Form 990

 Publicly available document, easily accessed via

 Significant redesign issued in 2008.

 The 990 now consists of a 12 page “core form” supplemented by various
  supporting schedules.

 Major focal points for the redesigned form are transparency regarding
  governance and compensation.

 The IRS believes that a well-governed organization is more likely to be a
  compliant organization.

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Overall Themes of Good Governance per the 990

 The Organization’s best interest is always top priority.

 Have an engaged, independent Board.

 Understand the regulations regarding tax-exempt organizations.

 Have written policies and p
               p                          place whenever p
                            procedures in p              possible.

 Transparency fosters compliance.

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Compensation – Schedule J

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Compensation – Schedule J

 Part I of Schedule J performs two functions:

  -   Increases Transparency of Executive Perks

  -   Helps the IRS Look for Likely Candidates for Intermediate Sanctions

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Schedule J – Let’s Talk Intermediate Sanctions

If an “Excess Benefit Transaction” takes place…..

I. Initial 25% excise tax is imposed on the disqualified person receiving the
   benefit. (Tax is levied on the amount of the excess benefit.)

II. A 200% excise tax is then imposed on the disqualified person if the excess
    benefit is not corrected on a timely basis.

III. Organization managers who knowingly participate in the excess benefit
     transaction are subject to a 10% excise tax.

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Things to watch on Schedule J, Part I

 Line 1a: Be sure the organization can support why these benefits are
  “reasonable”. Follow written policies regarding payment of these perks!

 Line 2: Be sure to have a policy in place so that you can check “Yes” to this

 Line 3: The more boxes you check in this section, the better.

 Lines 5 & 6: These are potential traps – especially Line 6.

 Line 7: It is easier for the IRS to attack “non-fixed” payments

 Lines 8 & 9: If you can check these “Yes”, that’s a bonus!

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Schedule J – Governance Considerations

 Understand your organization’s compensation practices.

 The creation of a board-level Compensation Committee can help inject
  independence into the process.

 Written compensation policies and procedures can save a lot of potential

 Remind folks that the potential excise taxes are levied on them!

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Form 990, Part VI – The Governance Centerpiece

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Form 990, Part VI - Most Talked About Policies

 Section B, Line 12a, b, & c: Conflict of Interest
  -   Is annual disclosure required?
  -   Does the entity monitor and enforce compliance?

 Section B, Line 13: Whistleblower Policy

 Section B, Line 14: Document Retention and Destruction Policy

 Section B, Line 10b: Do you have written policies governing the conduct of
  your chapters?

 Section A, Line 8a & b: Do you keep meeting minutes?

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Form 990, Part VI – The Annoying Questions

 Section A, Line 2: Family & Business relationships with Board members and
  key employees
  -   You only need to ask them, you can’t force them to respond!
  -   Don’t forget the “in the ordinary course of business” exception.
  -   Consider i
      C      id incorporating questionnaire i t annual conflict of i t
                           ti       ti    i into        l                   t li
                                                             fli t f interest policy

 Section B, Line 11a & b: Have all members of the governing body received a
  copy of the Form before it was filed? And, how does the organization review
  the 990?

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Form 990, Part VI – The Trap Questions

 Section A, Line 1b: The number of “independent” voting Board members

 Section B, Line 15a & b: Was compensation for CEO and other key
  employees set by independent persons?
  -   Really more of a trap for the CEO’s compensation, many organizations answer “No”
      to Line 15b.

 S ti B Li 16 & b D you participate i j i t ventures with t
  Section B, Line 16a b: Do             ti i t in joint     t               bl
                                                                    ith taxable
  entities? If so, do you have written policies to evaluate the allowability of such
  an endeavor?

 Section A, Line 5: Was there a “significant diversion” of assets?

 Part C, Line 18: Be sure to check at least one of the boxes!

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Schedule L – Transactions with Interested Persons

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Schedule L – Things to Consider

 Another “intermediate sanctions” trap!

 Disclosure is the key thing, not everything reported here is necessarily “bad”.
  -   An inadvertent omission can make something look much worse.

 Documentation and monitoring of these items is key.

 Involve the Board whenever possible.

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Grants and Assistance

Schedule F – Outside USA   Schedule I – Inside USA

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Grants & Assistance

 Key concept is whether the entity maintains records to document:
  1.    The amount of the grants and assistance
  2.    The grantee’s eligibility for the grant or assistance
  3.    The selection criteria used to award the grants or assistance

 In addition, how does the organization monitor the use of grant or assistance
  -    Written d    t ti i l         best.
       W itt documentation is always b t

 Schedule F is subject to particular scrutiny.

 Concerns are private inurement, tax compliance, and illegal acts.

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Schedule M – Noncash Contributions

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Schedule M – A few things to consider

 Line 30 is designed to help detect valuation errors on the part of donors.
  -   Be wary of entering into any such arrangement.

 Line 31, Gift Acceptance Policy, is a good idea. If you don’t have a written gift
        t        li       id implementing one.
  acceptance policy, consider i l        ti

 Line 32a is designed to reveal improper fundraising arrangements. If you say
      to thi      ti       lik l h ld be filling t Schedule G, Supplemental
  yes t this question, you likely should b filli out S h d l G S      l     t l
  Information Regarding Fundraising or Gaming Activities.

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Schedule C – Political Campaign and Lobbying Activities

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Schedule C – Political Campaign and Lobbying Activities

 Remember, for 501(c)(3)’s, POLITICAL activity is prohibited.

 Lobbying for a 501(c)(3) organization is permitted, but it cannot be a
  significant component of the entity’s activities.

 Schedule C gives you ample space to admit your sins!

 It’s a great idea to have documented policies regarding what governmental
  affairs activity is permissible.

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Form 990, Two other points to watch

 Part IV, Line 36: For 501(c)(3) organizations, “Did the organization make any
  transfers to an exempt non-charitable related organization?”
  -   Be careful about the flow of funds between related entities. Make sure payments
      from a (c)(3) to a non-charity are for services rendered or cost reimbursements.

 Part XII, Line 2c: “Does the organization have a committee that assumes
  responsibility for oversight of the audit, review, or compilation of its financial
  s a e e s and selection of an depe de accountant?”
  statements a d se ec o o a independent accou a
  -   Not a mandatory thing for IRS purposes, but often a great governance tool.

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Form 990 – Checklist of Required Schedules

 Read this on the very first day of
  each quarter.

 This can be an excellent tool to
  provide a heads-up if new
  governance issues have arisen.

 Plus, it can make your 990 prep
  easier if you know what information
  you need to gather!

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Good Luck!

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Description: Presentation from nonprofit accounting firm - Tate & Tryon - highlighting the changes to the new IRS Form 990 for nonprofit organizations and the impact it will have on organizational governance.